i can't see a more simple business than the one that has a steady continuous flow of throughput due to steady flow of consumption...
the volatility is only on the inventory valuation due to oil price fluctuations (with zero net cumulative effects) and the refinery margin, i.e the crack spread..
crack spread is "the one and only single variable" affecting the profitability of refinery
unlike other businesses with non-continuous revenue, where the management skills , competence, competitive edge, product superiority, demand etc plays an essential role in determining the success of the business...something difficult for investors to access and evaluate
refinery is basically a money printing plant...and you can see the rate it prints just by looking at the crack spread charts..
i think if an investor can't comprehend such basic common sense (logic)...i am unable to comprehend how they are investing on other stocks...
basically i guess icon give a buy call with erring that crack spread is not plain sailing. Could go south in a matter of next second.but i am in both hehehe.still low downside. take risk la.
can a competitor of a refinery of similar complexity factor kill its margins? The answer is "NO" without killing his own margins, i,e the crack spread.
Why?
Because the technology is pretty fixed - you can't invent a new technology which can improve the operating cost...the cost are pure energy and at the max perhaps you can improve by 0.5USD/brl... simply because you cant change the law of thermodynamics.
Now...the only thing they can use to compete is the economy of scale...purely by reducing the overhead cost per unit barrel. In other words go for a huge processing capacity with same human resources.
As we can see from PetronM plans for Refinery investment, the ideal capacity seems to be in the same range of HRC..considering foreseeable crack spread, demand and payback periods.
If you go too big (refinery capacity)...you are going to have huge inventory...and like a double-edged sword...when the crude oil is down trending you will incur enormous 'stock loss' and vice versa when it goes up.
On top of the ultra-thin Crack spread for years earlier, HRC suffered huge inventory losses when the crude oil price came down from 100 USD/brl to 40 USD/brl.
Now, at current Oil price...the possible inventory loss magnitudes in future will be minimal and chances of repetitions are almost Nil.
With current crack spread, and the certainty that its very unlikely to go below 6USD/brl - considering regional refining capacities in operations, HRC is well placed for a 'giant awakening'...
ok article and but not in-depth enough to understand the crude oil refining biz.
the article neglected to mention in-depth complexity of a refinery and the crude/blended/semi-refined grades used since it will have an impact on refining margin.
another then-popular strategy not mentioned is arbitraging between wti and brent futures.
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Posted by VenFx > 2017-07-16 15:09 | Report Abuse
This is Seriously in depth study over Refiner.
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